PSB stocks zoom ahead as fears of higher interest rates recede

AHMEDABAD: Shares of public sector banks (PSB) zoomed in the past one week after crashing to new annual lows a few days before that.

Attractive valuations, strong credit growth and the Reserve Bank of India governor’s indication that a further hike in interest rates may not be required combined to generate interest in PSB shares.

In fact, prices of some bank stocks have fallen close to or even below their book value. Over the last one year, banking stocks have significantly underperformed the broader markets. While the BSE Sensex has risen by 40% in the last one year, the BSE Bankex was down by 1% for the same period.

“Credit growth continues to be strong. Fears about a steep hike in interest rates have not materialised. Both these factors have caused stock prices to bounce back,” says TT Ram Mohan, banking and finance professor at the Indian Institute of Management - Ahmedabad.

After a strong credit growth of over 30% in the previous two financial years, the first quarter of ’06-07 is again showing a growth of over 30% in credit offtake. “In spite of the RBI’s efforts to cool down this fast-paced growth, bank lending is not slowing down to the 20% target set for it by the RBI in FY07,” says Ram Mohan.

Syndicate Bank was one of the biggest gainers with its stock shooting up by 26% from Rs 52 as on July 21 to Rs 65 on July 28. Among other big gainers were Bank of India whose share price jumped up by 24% during the same period, Vijaya Bank was up 22% and Bank of Baroda rose by 21%.

Vinod Sharma, head of research at Anagram Securities, told ET that the RBI governor’s indication that further rate hikes may not happen led to a relief rally in bank stocks. “If inflation is kept under check then banks would be amongst the major beneficiaries,” says Mr Sharma.

“We remain bullish on the sector and maintain our preference for private banks and large PSU banks for their competitive strengths,” says a recent report on the banking sector by investment firm SSKI. “We believe that with bond yields likely to peak out in coming months, mark to market losses would moderate and margins should stabilize.

We expect the rising interest rates to moderate the blazing credit growth to more sustainable levels of 21-22% CAGR with a salutary impact on margins,” says the SSKI report.